Pick Your Poison: The Exchange Rate Regime and Capital Account Volatility in Emerging Markets

Abstract

We characterize a country's exchange rate regime by how its central bank channels a capital account shock across three variables: exchange depreciation, interest rates, and international reserve flows. Structural vector autoregression estimates for Brazil, Mexico, and Turkey reveal such responses, both contemporaneously and over time. Capital account shocks are further shown to affect output growth and inflation. The nature and magnitude of these effects may depend on the exchange rate regime.

Keywords: exchange rate regime, capital account, structural vector autoregression

JEL Classification: F32, F32, F33